Wednesday, July 1, 2015

A Nation of Renters?

By Stephanie Allen, Project Assistant

It has been a while since we talked in depth about the housing market on this blog—about 3 years and 5 months, if you’re counting. Back then, way back in early 2012, we were all wondering when the market would hit bottom. Economists kept saying the economy wouldn’t recover until the housing market did and home prices just kept falling.

Now, home sales are at a five and a half year high, according to Reuters. But, that’s not the big news. The big news is that homeownership fell for the eighth straight year and is now at a 20 year low, according to a report published last week by the Joint Center for Housing Studies of Harvard University.

More people are renting than ever and vacancy rates for rentals are the lowest they’ve been since the mid-1990s.

Millennials are taking the majority of the blame for the dropping homeownership rates, though it seems to be Gen-Xers who aren’t buying. Homeownership rates among 35-54 year-olds have dropped more since 1993 than among any other age group. Among 35-39 year-olds, there’s been a 10% drop in just the last 10 years.

But, it isn’t just the young people who aren’t buying that are driving homeownership rates down. It’s also the 45-64 set who’ve traded owing for renting after waves of foreclosures and profitable seller’s markets. Households aged 45-64 accounted for almost twice the share or renter growth as households under the age of 35.

So, everybody’s renting more. Eight years of stagnant wages, pay cuts, a minimum wage that was more than a dollar higher an hour (in terms of real purchasing power) in 1968 than today, and mountains of student debt accumulated by X-ers and Millennials alike make saving enough for a down payment difficult, especially in this post-housing-market-bust economy where lenders are pretty tight fisted.

In areas with booming economies, saving for a down payment might not be a problem, but that’s not enough to buy. In markets like Boston, Denver, San Francisco, San Jose, Dallas, even Los Angeles, buying a house means facing some stiff competition and winning the bidding war usually requires ponying up a lot more cash than 20% and paying significantly more than asking. Check out some of these housing market horror stories.

And, renting is getting pretty expensive too. According to Zillow, rents were up 4% over last year in April—outpacing a 3% uptick in home prices over the same period. In hard hit places like San Jose, San Francisco, and Denver, rents are up more than 10% since last year. In the San Francisco region, and 16 other metro areas nationwide, more than one in four low- and moderate-income households spend half or more of their income on rent. Nationwide, roughly half of all renters pay more than 30% of their income in rent. Paying so much in rent makes saving for a down payment difficult.

And, according to the experts at Zillow (quoted here), this rental affordability crisis is here to stay and it’ll probably get worse before it gets better. If it’s true that high rents are contributing to low homeownership rates, it means we may see homeownership rates drop even further, at least in the near future.

Let’s jump back to 2012. Back then, economists were saying the economy wouldn’t recover until the housing market did. And that had a number of people, including me, questioning the role of homeownership in our society/economy. Here’s a quote from my 2012 blog post:

“To be sure, homeownership is part of the American dream, but bad policy and lack of oversight has turned that dream into a millstone around our necks. Is it possible to reconceive that dream? What would an America with a lot more renters look like? Would it spur a move away from the suburbs to central cities? Would it free us up to invest our money in other sectors of the economy? How might a move to a more renter-heavy society change the way we do economic development? “

This is what an America with a lot more renters looks like and the coming years will likely see even more. While at first it seemed cities had a lock on growth and were drawing people away from the suburbs, last year we saw the gap between urban and suburban growth narrowing. TIME magazine reported that it could indicate a return to more traditional patterns of city-suburban growth. Renting has most certainly not freed us up to invest our would-be down payments in other sectors of the economy—it’s costing us a fortune.

How might the move to a more renter-heavy society change the way we do economic development? In 2012, that question called for some imaginative speculation. Today, the question is pressing. How can we change our thinking in order to deal with the reality that we are a growing nation of renters?